8 ms·

We're going down some kind of bizarre path. Insurance is ultimately about risk sharing. If every risk is modeled then there is no insurance, just expensive prep

We're going down some kind of bizarre path. Insurance is ultimately about risk sharing. If every risk is modeled then there is no insurance, just expensive prepayment.

tlb 8y ago
If I have a 1% chance of a car accident, I’d be happy to pay 1.5% the cost of hospital bills for insurance. Someone else with a 2% chance of an accident should be happy to pay 3%. That’s still insurance. Only if you deny free will and assume perfect information and deterministic laws of physics, can every risk resolve to either 0% or 100%.
- zAy0LfpBZLC8mAC 8y ago
  What is the practically relevant difference between 100% prediction capability and 99.999% prediction capability?
  - chimeracoder 8y ago
    > What is the practically relevant difference between 100% prediction capability and 99.999% prediction capability? If there were 100% prediction capability, there would be no risk to smooth, and there would be no reason to buy insurance, because the insurance would be more expensive than paying the costs of the would-be insured risk directly.
    - zAy0LfpBZLC8mAC 8y ago
      But with 99.999%, there is a risk to smooth in practice? How about 99.99999999999999999999999999999999%?
      - chimeracoder 8y ago
        > But with 99.999%, there is a risk to smooth in practice? How about 99.99999999999999999999999999999999%? Uh, I guess this question might be interesting from an academic perspective, but not a practical one. There's no risk out there which can be predicted with 35 nines of precision, let alone one that people are interested in insuring. And certainly not one in which the overhead of providing services wouldn't inherently dwarf any benefits to both parties.
        zAy0LfpBZLC8mAC 8y ago
        In other words: There is no practically relevant difference between a prediction ability of 100% and 99.99999999999999999999999999999999%, which is exactly the point I was making: There is is nothing magical about the 100% mark--free will or assuming perfect information is irrelevant to the problem at hand, insurance becomes asymptotically less useful the better risks are modeled and used to set premiums where the premiums cannot work as an incentive to avoid the risks in the first place.
FireBeyond 8y ago
As it in the US, that's already the case. It's amortized and expensive payments, and not "true" insurance. Or rather, insurers like to take all of the pros of being an insurer, and none of the cons. Risk pool didn't change by your entry into it? So what, if there's something deniable, we will. Etc, etc.
mr_overalls 8y ago
You're right. In the US at least, health insurance is mostly a payment management scheme. Casualty insurance (for accidents, disasters, etc.) more closely resembles a true insurance product.
lftl 8y ago
This is the core problem of health insurance as currently structured in the US -- everyone will make a claim eventually so it's effectively a whole life insurance policy except the payout is sporadic and involves tons of bureaucratic crap. I personally would be fine with either universal healthcare or regulating the marketing to outlaw non-catastrophic health "insurance" thereby forcing routine care to be a direct payment relationship with your doctor.
- freehunter 8y ago
  That's a good point and one I've never linked in my mind. My insurance company takes monthly payments from me in exchange for a certain amount of coverage, then they either mandate or strongly recommend that I go to the doctor regularly, which they will cover for a nominal cost to me... basically I'm paying for "insurance" for something that the insurance company has me do on a regular and recurring schedule (visit my doctor). Whatever your politics on healthcare, it does seem insane that something as routine as visiting the doctor for a yearly physical could be so expensive that you need insurance to pay for it. Like you said, insurance should be to cover unpredictable catastrophic events. My homeowners insurance doesn't pay for roof maintenance until the old one fails. My car insurance doesn't pay for car maintenance until I've had a collision. Why is my health insurance covering routine maintenance?
  - roel_v 8y ago
    "Why is my health insurance covering routine maintenance?" Because the preventative care reduces the costs down the line, and there is no way for an insurer to check if people are actually doing their routine maintenance if they don't do it. So it's better to include it in the premium. It's different from your roof in that your HO insurance only covers freak accidents (not failure because of old age), whereas health insurance covers many old age related problems.
    - chimeracoder 8y ago
      > Because the preventative care reduces the costs down the line This is a common myth. Preventive care actually doesn't reduce costs, on net. It improves the overall quality of care, yes, but it doesn't (in aggregate) save more money than it requires. For some conditions, early intervention is cheaper (and more effective) than delayed intervention, but that's not always the case - and either way, it's not considered preventive care.
cryoshon 8y ago
>just expensive prepayment. you have discovered their business model.
- lotsofpulp 8y ago
  PPACA legislation caps net income for health insurance companies at 15% of revenue.
  - erik_seaberg 8y ago
    … and now I have no incentive to press for lower health care costs, because if I succeed I get the same percentage of a smaller number.
    - lotsofpulp 8y ago
      Unless everyone had to sign up for insurance allowing enough population so that multiple health insurance companies can co-exist and compete on price.
chimeracoder 8y ago
> We're going down some kind of bizarre path. Insurance is ultimately about risk sharing. If every risk is modeled then there is no insurance, just expensive prepayment. This is completely backwards. Insurance is about risk smoothing, across states of the world. Insurance should not have a positive expected value - that is, there should be no person for whom the total lifetime expected payouts exceed the total lifetime expected costs. For a number of reasons, health insurance isn't actually insurance, and this is one of them. You can identify individuals who are dramatically likely to receive more money in payouts and benefits than they are to pay in their regular premiums, which means you're talking about a redistribution system, not an insurance system.
- wool_gather 8y ago
  I think the point parent is making is that there's (nominally/supposed to be) smoothing across people too. The uncharitable description is that "healthy people are subsidizing sick people". Part of the reason we accept this is that each individual doesn't know whether she will get sick. She pays the premium, not because she knows she'll need it, but because she knows not having it is worse, if she gets sick. But the insurance also has price proportionate to the chance she will need it. The more finely the chance it'll be needeed is known, the more closely individual prices will match the probability, and thus less smoothing will take place.
  - chimeracoder 8y ago
    > I think the point parent is making is that there's (nominally/supposed to be) smoothing across people too. The uncharitable description is that "healthy people are subsidizing sick people" That's a common refrain, but it's wrong and misleading. It's why people talk about young and healthy people being "necessary" to balance out the costs of the older and sick under the ACA. That's describing a redistribution scheme, not insurance. > But the insurance also has price proportionate to the chance she will need it. No, they don't. They price based on age, sex, zipcode, income, and smoking status. That's only very loosely related to the chance that she will need it. It's nowhere near enough to provide precise pricing. > The more finely the chance it'll be needeed is known, the more closely individual prices will match the probability, and thus less smoothing will take place. No, that's another common misconception. The price is not determined by the ability of the insurer to predict the probability of the risk; that's what determines the insurer's profit margins. Under a free insurance market, the price is determined by the relative demand and supply of patients and insurers.
rhizome 8y ago
There is a concept in insurance called "shirking," which is the principle of externalizing as much risk as possible.
- supertrope 8y ago
  All businesses are constantly externalizing costs.
  - rhizome 8y ago
    I didn't mention costs.
    - supertrope 8y ago
      Risk can be considered a cost. Expected value = sum of individual payoffs * their individual probabilities.

We're going down some kind of bizarre path. Insurance is ultimately about risk sharing. If every risk is modeled then there is no insurance, just expensive prepayment.

tlb 8y ago

If I have a 1% chance of a car accident, I’d be happy to pay 1.5% the cost of hospital bills for insurance. Someone else with a 2% chance of an accident should be happy to pay 3%. That’s still insurance. Only if you deny free will and assume perfect information and deterministic laws of physics, can every risk resolve to either 0% or 100%.

zAy0LfpBZLC8mAC 8y ago
What is the practically relevant difference between 100% prediction capability and 99.999% prediction capability?
- chimeracoder 8y ago
  > What is the practically relevant difference between 100% prediction capability and 99.999% prediction capability? If there were 100% prediction capability, there would be no risk to smooth, and there would be no reason to buy insurance, because the insurance would be more expensive than paying the costs of the would-be insured risk directly.
  - zAy0LfpBZLC8mAC 8y ago
    But with 99.999%, there is a risk to smooth in practice? How about 99.99999999999999999999999999999999%?
    - chimeracoder 8y ago
      > But with 99.999%, there is a risk to smooth in practice? How about 99.99999999999999999999999999999999%? Uh, I guess this question might be interesting from an academic perspective, but not a practical one. There's no risk out there which can be predicted with 35 nines of precision, let alone one that people are interested in insuring. And certainly not one in which the overhead of providing services wouldn't inherently dwarf any benefits to both parties.
      - zAy0LfpBZLC8mAC 8y ago
        In other words: There is no practically relevant difference between a prediction ability of 100% and 99.99999999999999999999999999999999%, which is exactly the point I was making: There is is nothing magical about the 100% mark--free will or assuming perfect information is irrelevant to the problem at hand, insurance becomes asymptotically less useful the better risks are modeled and used to set premiums where the premiums cannot work as an incentive to avoid the risks in the first place.

FireBeyond 8y ago

As it in the US, that's already the case. It's amortized and expensive payments, and not "true" insurance. Or rather, insurers like to take all of the pros of being an insurer, and none of the cons. Risk pool didn't change by your entry into it? So what, if there's something deniable, we will. Etc, etc.

mr_overalls 8y ago

You're right. In the US at least, health insurance is mostly a payment management scheme. Casualty insurance (for accidents, disasters, etc.) more closely resembles a true insurance product.

lftl 8y ago

This is the core problem of health insurance as currently structured in the US -- everyone will make a claim eventually so it's effectively a whole life insurance policy except the payout is sporadic and involves tons of bureaucratic crap. I personally would be fine with either universal healthcare or regulating the marketing to outlaw non-catastrophic health "insurance" thereby forcing routine care to be a direct payment relationship with your doctor.

freehunter 8y ago
That's a good point and one I've never linked in my mind. My insurance company takes monthly payments from me in exchange for a certain amount of coverage, then they either mandate or strongly recommend that I go to the doctor regularly, which they will cover for a nominal cost to me... basically I'm paying for "insurance" for something that the insurance company has me do on a regular and recurring schedule (visit my doctor). Whatever your politics on healthcare, it does seem insane that something as routine as visiting the doctor for a yearly physical could be so expensive that you need insurance to pay for it. Like you said, insurance should be to cover unpredictable catastrophic events. My homeowners insurance doesn't pay for roof maintenance until the old one fails. My car insurance doesn't pay for car maintenance until I've had a collision. Why is my health insurance covering routine maintenance?
- roel_v 8y ago
  "Why is my health insurance covering routine maintenance?" Because the preventative care reduces the costs down the line, and there is no way for an insurer to check if people are actually doing their routine maintenance if they don't do it. So it's better to include it in the premium. It's different from your roof in that your HO insurance only covers freak accidents (not failure because of old age), whereas health insurance covers many old age related problems.
  - chimeracoder 8y ago
    > Because the preventative care reduces the costs down the line This is a common myth. Preventive care actually doesn't reduce costs, on net. It improves the overall quality of care, yes, but it doesn't (in aggregate) save more money than it requires. For some conditions, early intervention is cheaper (and more effective) than delayed intervention, but that's not always the case - and either way, it's not considered preventive care.

cryoshon 8y ago

>just expensive prepayment. you have discovered their business model.

lotsofpulp 8y ago
PPACA legislation caps net income for health insurance companies at 15% of revenue.
- erik_seaberg 8y ago
  … and now I have no incentive to press for lower health care costs, because if I succeed I get the same percentage of a smaller number.
  - lotsofpulp 8y ago
    Unless everyone had to sign up for insurance allowing enough population so that multiple health insurance companies can co-exist and compete on price.

chimeracoder 8y ago

> We're going down some kind of bizarre path. Insurance is ultimately about risk sharing. If every risk is modeled then there is no insurance, just expensive prepayment. This is completely backwards. Insurance is about risk smoothing, across states of the world. Insurance should not have a positive expected value - that is, there should be no person for whom the total lifetime expected payouts exceed the total lifetime expected costs. For a number of reasons, health insurance isn't actually insurance, and this is one of them. You can identify individuals who are dramatically likely to receive more money in payouts and benefits than they are to pay in their regular premiums, which means you're talking about a redistribution system, not an insurance system.

wool_gather 8y ago
I think the point parent is making is that there's (nominally/supposed to be) smoothing across people too. The uncharitable description is that "healthy people are subsidizing sick people". Part of the reason we accept this is that each individual doesn't know whether she will get sick. She pays the premium, not because she knows she'll need it, but because she knows not having it is worse, if she gets sick. But the insurance also has price proportionate to the chance she will need it. The more finely the chance it'll be needeed is known, the more closely individual prices will match the probability, and thus less smoothing will take place.
- chimeracoder 8y ago
  > I think the point parent is making is that there's (nominally/supposed to be) smoothing across people too. The uncharitable description is that "healthy people are subsidizing sick people" That's a common refrain, but it's wrong and misleading. It's why people talk about young and healthy people being "necessary" to balance out the costs of the older and sick under the ACA. That's describing a redistribution scheme, not insurance. > But the insurance also has price proportionate to the chance she will need it. No, they don't. They price based on age, sex, zipcode, income, and smoking status. That's only very loosely related to the chance that she will need it. It's nowhere near enough to provide precise pricing. > The more finely the chance it'll be needeed is known, the more closely individual prices will match the probability, and thus less smoothing will take place. No, that's another common misconception. The price is not determined by the ability of the insurer to predict the probability of the risk; that's what determines the insurer's profit margins. Under a free insurance market, the price is determined by the relative demand and supply of patients and insurers.

rhizome 8y ago

There is a concept in insurance called "shirking," which is the principle of externalizing as much risk as possible.

supertrope 8y ago
All businesses are constantly externalizing costs.
- rhizome 8y ago
  I didn't mention costs.
  - supertrope 8y ago
    Risk can be considered a cost. Expected value = sum of individual payoffs * their individual probabilities.